Managing Tax Controversy

An outline of the ways in which corporate taxpayers are dealing with issues of tax controversy in today’s controversial tax climate

Corporate taxpayers are being confronted with increasingly frequent and aggressive audits. The result is that tax issues and disputes (also referred to as "tax controversies”) are on the rise. Studies show that disputes between revenue authorities and international companies have never been greater.

It is not simply that taxpayers are being scrutinized more by revenue authorities, it is also that authorities from different jurisdictions are communicating with each other and exchanging information. Governments, in their effort to pay off debts, are encouraging audits with other territories and, just as one revenue authority pursues a contentious tax issue, so too does the next with a domino-type effect on a group of companies which ends up facing a seemingly never-ending host of enquiries, investigations and audits.

With companies already being pressurized to pay tax authorities a significant percentage from their profits, it is no wonder that their representatives are frustrated with being squeezed for as much as possible – and then some. It is against this background that we are noticing a change in taxpayers’ attitudes, where they are no longer prepared to merely accept their fate as dictated by the relevant revenue authority. We are seeing a trend whereby taxpayers actively adopt a stance in defending their positions after engaging with seasoned tax controversy experts. The effect of tax controversy has never been more apparent than in today’s climate, or more important, and its scope includes (but is not limited to) the anticipation and management of a company’s risks, reputation and governance.

Companies are becoming proactive by appointing tax experts who specialize in the area of tax controversy. Tax controversies require experienced tax advisors with litigation skills who have a fundamental appreciation of the tax law and its shaping policy considerations, and have extensive practical experience with revenue authorities. These experts are equipped with the knowledge and expertise to handle all types of tax disputes, to review historical transactions and their repercussions, and also to consider current decisions and their potential consequences. Their skills traverse the pre-audit prevention phase, the actual audit/examination and the post-audit settlement or dispute resolution phase.

Every company is unique and, accordingly, each taxpayer is treated on an ad hoc basis in determining past, present and future risks. The head of tax controversy interacts with the company’s own appointed tax director, who in turn communicates directly with the board. Since the tax director receives proper guidance from the head of tax controversy, he/she is fully briefed by the time the board is informed, and decisions are only made after due consideration is given to the tax issues by the head of tax controversy. This process ensures that a board is now far better briefed than in previous years.

With unprecedented disclosure requirements by legislation, it is a given that companies’ decisions will be disclosed, most likely questioned and potentially shared – sometimes inaccurately and unwarranted. The ramifications of this are not limited to mere tax exposure but also extend to reputational risk, and it is critical that a tax controversy expert understands the taxpayer’s appetite for challenging a revenue authority. The head of tax controversy is in the best position to explain the options and suggest the ideal way forward. This may be inter alia tax litigation, audit resolution or a negotiated settlement – all of which need to be managed carefully to ensure protection of the taxpayer’s reputation.

Tax controversy leaders are well versed in the alternative rights and remedies available and will evaluate the best strategy only after all relevant factors have been taken into account. It is not to say that all issues will turn litigious. It may be that the tax controversy expert assists with document collation and preparation for an audit, as well as assistance throughout the audit process, to ensure an amicable and expeditious outcome thereof. From the practical solutions, to the political – involving the promotion of good relations between taxpayers and revenue authorities – the tax controversy expert will be able to advise.

Because of their roles and responsibilities, heads of tax controversy keep abreast of the risks companies are facing, and how to tackle them. They are alive to the pressing issues of the time and can inform their clients of what is being targeted and why. They are able to analyze problems to their core at the onset of a tax controversy and use that analysis to guide responses to revenue authorities’ activities and positions. Thus, instead of taxpayer’s assuming a reactionary position, they are advised by the tax controversy expert in advance with whatever the appropriate strategy for that particular tax controversy may be, to the extent that there is an identifiable risk in the organisation.

The tax controversy minefield through which taxpayers are expected to navigate is certainly daunting. Basic elements of audits and controversies are constantly evolving so that we observe new approaches of how revenue authorities are obtaining information, how they select who will be audited, their choice of audit techniques, and how controversies are being resolved. However, the risks can be managed and minimized. Companies can focus on compliance and managing same to ensure the correct checks and balances are in place. This must be coupled with internal transparency, together with proper and consistent disclosure in accordance with reporting requirements. Once this is correctly implemented, the potential risk areas should be identified, with a clear plan in mind how these should be addressed and what the dispute resolution mechanisms are.

With increased measures of enforcement and transparency, companies are going to need an expert in tax controversy to help guide them through the fundamental processes they should be employing in their businesses, as well as combating the many challenges up ahead.

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